Washington morass fails to stop jobs improvement

Hiring likely rose in February despite higher taxes, sequester fears

WASHINGTON (MarketWatch) — Companies have somehow managed to shrug off the endless series of fights in Washington over taxes and spending to keep adding to their payrolls to meet a gradual increase in demand.

The U.S. had added an average of more than 175,000 jobs a month over the past two years, all in the private sector. All signs points to a similar gain in hiring in February.

Consumer spending, the mainspring of U.S. growth, has held up fairly well in early 2013 despite a tax increase. The manufacturing sector is on the rebound. And business investment accelerated sharply in the first month of the new year.

The February employment report, released Friday, headlines a light economic calendar. Economists surveyed by MarketWatch project the U.S. added 160,000 jobs last month, with the unemployment rate staying at 7.9%. (Note that consensus expectations can change ahead of the release.)

Also on the docket: The monthly U.S. trade deficit, weekly jobless claims and a survey that takes the temperature of the service sector side of the economy, which employs 80% of American workers.

Washington, on the other hand, is embroiled in another dispute. This time it’s over the so-called sequester law requiring up to $85 billion in federal spending cuts over the next six months. The sequester could act as a mild drain on the economy and even crimp hiring if most cuts go through as planned.

“We are in the beginning stages of the federal government pulling back a bit,” said Steve Wood, chief market strategist at Russell Investments in New York. “Increased taxes and reduced government outlays keep you in the 2% annual growth range. So we are above stall speed.”

That’s not a ringing endorsement. Thanks partly to Washington, in other words, the economy is likely to grow in 2013 at roughly the same pace as it did in 2012 and 2011.

Runup to main event

The week kicks off with Tuesday’s report on the U.S. service sector. The Institute for Supply Management’s gauge of economic health is expected to show that businesses that supply things like health care, financial advice and meal preparation are still doing quite well.

Unlike manufacturers, service companies are not as closely tied to state of the global economy. People still need to go to the doctor, cash checks at the bank or get a hair cut every few months regardless whether Europe is in recession or a neighbor just lost his job.

On Wednesday, the payroll-processing firm ADP
ADP, +0.63%
will preview its own hiring report for February. While ADP can yield clues about the government jobs number, the two reports are sometimes sharply at odds in the short run. Investors and economists treat the ADP report with caution.

The weekly jobless claims report on Thursday, meanwhile, could take on more gravity than usual if the number of people filing new applications for unemployment benefits remains below 350,000. Initial claims fell last week to 344,000, just above a five-year low.

The latest claims numbers suggest that layoffs continue to dwindle, though it’s by no means clear that companies have embarked on a hiring spree.

Employment picture

The February jobs report is unlikely to answer that question, either. Whatever gains that occurred last month, for one thing, could be partly undone if the sequester-related cuts significantly dampen U.S. growth.

Yet no one really knows how much the sequester will hurt or how long the pain will take to show up in the data. Some defense companies may have cut back on spending and hiring, but the vast majority of consumers and businesses won’t notice a thing.

“We probably won’t see much impact from sequestration in February or March,” said Joel Naroff of Naroff Economic Advisors, who’s no fan of the automatic spending cuts. “One reason is the cry-wolf syndrome. People and businesses have gotten to the point of, ‘I will believe it when I see it.’ ”

Still, the sequester introduces yet another Washington-generated cloud of uncertainty to the economic picture. There’s also the risk it will magnify the drag to the economy from a 2% increase in the payroll tax that took effect in January.

If only Washington would resolve all its budget disputes or at least get out of the way, many economists believe, the economy might start to churn out jobs at the fastest pace since the 2007-2009 recession ended.

“If we believe all the data, we have some momentum coming out of January,” Naroff said. “We should be getting 175,000 to 200,000 jobs a month. That’s what the numbers tell us.”

The numbers, of course, have suggested much faster job creation was on the way several times before. After several false starts, investors and the unemployed will only believe that when they actually see it.

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